Bundesbank Fears “Doom Loop”

But Draghi Still Doesn’t Get it.

“ECB barrel-scraping getting louder” – that’s what Daiwa Capital Markets called it. But those acts of desperation, as sweet as they seem to the markets, had slammed into opposition at the German Bundesbank. And now “people familiar with the matter” and a “central bank source” are talking to the Wall Street Journal to air their concerns.

Yesterday, the ECB bent over backwards to increase the negative interest rate absurdity, given how well it has been working so far. It cut its deposit rate one notch to negative 0.4%. That was less than expected. But it also added a slew of “surprises” intended for the markets to feed on and soar.

It cut the main refi and marginal lending rates to 0% and 0.25% respectively. It expanded the monthly asset purchases by a greater-than-expected €20 billion to €80 billion, now including euro-denominated corporate bonds. It added four “targeted longer-term refinancing operations” (TLTRO II), with maturities of four years, conducted quarterly starting in June. These loans are subject to the refi rate, now 0%. But if banks increase their lending past certain benchmarks, the interest rate can drop as low as negative 0.4%. In other words, banks would get paid by the ECB to borrow from the ECB.

This is some serious money-printing and market manipulation explicitly intended to inflate corporate bond prices further, push even corporate bond yields near or into the negative, and prop up stocks. And to heck with the economy. But that’s a big problem for the Bundesbank.

Bundesbank President Jens Weidmann currently cannot vote at the ECB due to the rotating voting rights. And he cannot speak out publicly against Draghi’s machinations. So rather than mope in his corner, he’s unloading via “people familiar with the matter” to the Wall Street Journal.

He was particularly opposed to the expansion of the bond purchase programs, the “people familiar with the matter” said, which he’d opposed before for fear they’d do exactly what they’ve been doing and have been designed to do from get-go, namely create asset bubbles and remove the pressure on governments to reform.

While he was “willing to debate” policy tools such as interest rates and loans, he “may have preferred to do nothing at all, the people said.”

Now “some members” of the ECB’s governing council “are concerned that after years of easy-money policies, fresh stimulus is growing less effective.”

And a central-bank source, presumably from the Bundesbank, said that these increasing forays into ever more radical monetary policies could trigger “a doom loop of expectations and disappointment.”

All kinds of secrets come out once people familiar with the matter are talking. While Draghi claimed yesterday that “it was all in all a very reassuring discussion, very positive, very constructive,” and that the decision was approved by “the overwhelming majority,” turns out only 19 of the 25 council members voted for it, with Weidmann and three others unable to vote, and with two – German ECB Executive Board member Sabine Lautenschlaeger and Dutch central-bank Governor Klaas Knot – voting against it.

By now even proponents of these policies admit that they don’t work in stimulating the economy, though they were never designed to stimulate the economy in the first place. They were designed to create asset bubbles and bail out over-indebted governments. So Latvian central bank governor Ilmars Rimsevics – who’d voted with Draghi, according to these people familiar with the matter – got on TV today to explain what all this means:

“Presently, unfortunately, there are no sweet medicines left,” he said “What the European Central Bank has done – just printing money – increases the amount of money in circulation, but is unable to print the European economies out of crises, out of this stagnation.”

This was followed up by ECB Vice President Vítor Constâncio, a big proponent of all these absurd policies that have helped bail out the growing mountain of debt of his country, Portugal. Writing on the ECB website, he added a curious warning in our direction:

That decision was taken against a backdrop of vocal skepticism in the media and markets. The skeptics’ reasoning is two-pronged. First, that monetary policy is not sufficient to address the present low growth trend; and second, that monetary policy is increasingly ineffective in any case.

He instantly admitted and simultaneously brushed off with surprising ease the first reason of these awful “skeptics”: it’s “mostly true but trivial,” he said. “The current problem is lack of global demand,” and monetary policies can’t change that.

But then, in addressing the second reason, he blamed the “skeptics,” like us here, for the utter failure and nefarious effects of the current monetary policies, and he warned:

So if these other policies either can’t or won’t contribute to a significant degree, then not only is it wrong to start talking down monetary policy – it’s actually dangerous.

What this means is simple: Now that even central bankers like him admit that monetary policies don’t work in achieving economic growth, even though these policies get driven to ever greater levels of absurdity, no one is allowed to point that out anymore because it has suddenly become “dangerous” to do so.

Or is he saying that we have become “dangerous?” We’re beginning to look over our digital shoulder.

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32 comments for “Bundesbank Fears “Doom Loop””

NotSoSure

Mar 11, 2016 at 4:48 pm

Oh I think Draghi is getting it. His overlords are telling him to checkmate the Bundesbank, who just like every delusional people/organization out there just wants to have their cake and eat it too i.e. not subsidize their exports.

Not saying Draghi is some kind of heroic figure, but his overlords no doubt want to be hegemons of a truly unified Europe, so either that will happen or they already have enough put options to hedge their bet.

nhz

Mar 13, 2016 at 12:02 pm

Seems to me that Draghi’s G$ overlords want to bleed Europe dry for their own good before sacrificing it in their next war (there’s nothing better for profits than a new World War, but the neocons prefer not to have it on their own doorstep) or at least killing the EU economy (to keep the US on top for a bit longer and make it easier to target Russia).

All that stimulus money seems to be heading for Wall St. The bubbles here will be getting bigger.

Jungle Jim

Mar 11, 2016 at 6:26 pm

Petunia, you are probably correct, but, the arrival of that hot money will drive the dollar up which has to be the last thing Janet Yellin wants to see. It will price our exports out of the market.

I don’t know where we are going, or exactly when we’ll get there, but I’m fairly sure that when we find out, we aren’t gonna like it.

CENTURION

Mar 11, 2016 at 6:41 pm

As long as the Bankers can issue “credit”, this can go on for a very long time.

walter map

Mar 11, 2016 at 8:10 pm

“The American ruling class has been trying to figure out for years, if
not decades, how to manage decline, how to get Americans to get used to diminished expectations, how to adapt to the notion that life for the
next generation will be worse than for the previous generation, and now,
how to accept … low to zero growth rates as the new economic normal.”

This sounds like the philosophy of restricting growth for the sake of minimizing environmental impact. Recall, Hilary was called onto the carpet for supporting the goals of the oil industry.

Rippshot

Mar 12, 2016 at 4:31 am

They’ll have the same future as the young in third world countries have had for many years.

Boo hoo

Jimbo

Mar 17, 2016 at 1:13 pm

Cry your eyes out, but why have children if you’re unable to offer them a better future.

Dan Romig

Mar 11, 2016 at 8:30 pm

“Bundesbank president … currently cannot vote at the ECB due to rotating voting rights.”

We don’t need no stinkin’ voting rights, Draghi calls the shots.

Hell of a system there in the EU.

Al Tinfoil

Mar 11, 2016 at 8:34 pm

IMHO, the ECB moves appear entirely predictable. ECB VP Constancio lets some light into the mystery when he states “The current problem is lack of global demand”. In other words, customers everywhere are not buying enough to keep the debt-ridden producers of Europe and elsewhere in profits. Asset bubbles created by earlier QE efforts are in danger of popping or are popping, and hence the current ECB strategy to keep kicking the can down the road by buying up government and corporate bonds and NIRP which will pay banks to borrow from the ECB.
Put more precisely, Draghi and the ECB will pursue more of the US TARP strategy of buying up non-performing loans and flooding banks and corporations with liquidity to keep the banking system and stock and bond markets from crashing under the weight of bad debts on their books.
Expect the ECB to pump about 300 Billion Euros into Italian banks in the near future to keep those banks afloat. Spain and Portugal will get the same treatment.
Ironically, the ECB is trading the integrity of the Euro for short-term preservation of the Euro system. Euro printing debases the Euro but using QE to buy up bad debts keeps the overall system afloat a while
longer.
Extend and Pretend.

Is make it impossible for anybody but banks, to have any form of vaguely secure way of making a profit, from nonworking money. (Ie interest return on guaranteed cash deposit.)

Even corporate bond returns in Europe, have fallen to a level making them untenable, as an investment return revenue stream. Let alone the risk levels.

Bail in legislation makes Euro banks untenable for savers.The same savers are being whipped even harder, with the screams from the head mafiosi at the ECB, spend, borrow, spend, borrow, at every stroke.

Germany has taken the ECB to court before, and won. This Mafiosi, clandestine bail out of the club med states banks, with German taxpayers funds, is not yet done and dusted.

Not by a long long shot.

The cheif Mafiosi at the ECB is still channeling money to banks, More supply side stimulus, which has repeatedly failed.

What is needed is investment in needed Infrastructure (Real Infrastructure(many schools are long overdue for replacment)) not more bridges and airports to nowhere.

Not Infrastructure that makes it easier for china, directly or indirectly, to steal more European jobs.

The system dosent need more cash it needs investment. Savers will not in invest in business in this unstable over regulated environment. Which has an unfair, unsafe, playing field, ultimately due to the dumping and currency manipulation activity’s, of china.

I dont yet have the answer for the saver, but I do know the answer is definitely, NOT GOLD.

d

Mar 12, 2016 at 5:06 am

One of the few places to put some money, may be in the english style housing corporations, as long as their paying occupancy levels are high.

Their debt ratios low, and they do not intend to expand in Supply glutted areas.

Ptb

Mar 12, 2016 at 10:10 am

It is interesting to note that CBs buying of debt with money that was never earned, is essentially creating a kind of indefinite inflationary effect. And if it ever was defaulted upon, who would be hurt by the “loss” ?

d

Mar 13, 2016 at 3:34 am

Inflationary effect.

Is what they want it to do.

They have however created to much liquidity from air.

There is no liquidity shortage, there is a shortage of (Genuinely) safe places, to put or invest that liquidity.

NIRP which is a big FUD weapon its simply about preventing banks miking the CB’s. As the banks have huge liquidity volumes parked in the CB’s doing nothing. that was earning interest.

They are supplying liquiditynto the top attempting to stimulate trickled down

Which works, if the consumer at the bottom, has the disposable income, to create the demand, for trickle down.

The consumer has been over-leveraged, by $100.00 plus oil and huge interest cost, created buy huge housing bubbles, blown by speculators, Fueled by excess CB credit. And cronyism.

CB’S can do nothing more, governments must bite the bullet and do what O bummer in particular was told to do and refused to after QE 1.

Slowly stimulate needed infrastructure, putting stimulus where need at the bottom, which will reduce leverage then stimulate demand, at the bottom.

O bummer would rather pay his voters, to do nothing, rather than work. which stimulates drug abuse.

Christoph Weise

Mar 12, 2016 at 11:07 am

No revolt in Germany. The vast majority of the Germans (and the citizens in other countries) do not understand that NIRP and ZIRP are killing their pension schemes as a consequence of which they all will become dependent from welfare if they should retire before death. If they would understand we would have a revolt. The small number of people that do understand what is going on have no political platform to voice their protest (exactly like in the US) because the leading political parties silence critical voices and manage the narratives published by the mass media.

nhz

Mar 13, 2016 at 11:50 am

In Netherlands the risk to pensions of current ECB strategy has become a topic even in the MSM. But it is being used first of all by the pension fund managers as an incentive to relax the rules that try to make sure there will still be a pension for younger contributors. If politics approves the pension buffers will be raided to enable golden pensions for the boomers for a bit more years, instead of limiting pensions because the system is imploding. The pension fund managers are still promising 8-9% average yearly returns on capital, they clearly learned nothing.

And yes, the general public here doesn’t understand either and none of the bigger parties represents those who demand change because all this is moving in the wrong direction.

P.S.: Dutch central bank president Knot was the only ECB board member who voted against the new policy. Primarily to cover his a** IMHO. The ECB is ruled by Goldman and cheered by the mob from Southern Europe, who want low rates forever to keep their banks ‘solvent’ and to prop up their shaky housing bubbles. Of course most politicians in Northern Europe also like NIRP because if enables more ‘bread and circuses’ at least in the short run.

unit472

Mar 12, 2016 at 12:04 pm

Whither the ECB’s 2% inflation target? Deflation is and has been Draghi’s great fear and yet achieving ‘less than but close to 2% inflation in the Eurozone seems ever more distant . Germany is now in outright deflation and the last time Europe had high inflation was when Trichet was hiking interest rates. It maybe counterintuitive but raising interest rates seems to be, empirically, the path to higher inflation.

nhz

Mar 13, 2016 at 11:56 am

deflation only exists in the bogus statistics.

I see no sign of deflation at all in Netherlands, almost everything I need is surging in price; over the last 5 years or so most mandatory costs (taxes, rent, health insurance, energy, transport etc.) have gone up with 5-10% per year. From the start of the euro in 2002 many prices have increased by 50-100%. But I don’t doubt that whatever happens, the liars from Eurostat will present ‘deflation’ numbers so the ECB con game can continue for a little longer.

You may be right about the last part though, but it really depends on how politics is going to handle the massive defaults and debt restructuring that is going to occur when interest rates go up again. If they try to make savers pay for all the damage (again) I don’t see how inflation could increase as a lot of potential buying power will disappear.

The 1% went to war on the 99% (aka the global consumer), very silly really.

The class war has destroyed demand.

Inequality is a problem for investors too.

2014 – “85 richest people as wealthy as poorest half of the world”
2016– “Richest 62 people as wealthy as half of world’s population”

Doing the maths and assuming a straight line …….
5.4 years until one person is as wealthy as poorest half of the world.

So much money to invest and so few investment opportunities.

The problem of inequality.

Better get some helicopter money to the masses to increase demand.

A good quote from John Kenneth Galbraith’s book “The Affluent Society”, which in turn comes from Marx.

“The Marxian capitalist has infinite shrewdness and cunning on everything except matters pertaining to his own ultimate survival. On these, he is not subject to education. He continues wilfully and reliably down the path to his own destruction”

Marx made some mistakes but he got quite a lot right.

Jeez, no one told me that global employees are the global consumers.

So as we all increase profits by cutting labour costs we are effectively cutting our own throats.

With global investors having no faith in Mario, expect a tidal wave of cash to hit Wall Street this year.

Dow 20,000 anybody?

Ptb

Mar 12, 2016 at 3:56 pm

It does seem as though there’s a systemic trend to eliminate personal cash. NIRP and digital money, etc. could be a real capital flow into stocks, real estate and hard assets.

human

Mar 12, 2016 at 8:42 pm

Comment *Seems like a dictatorship.
no Democratic governments can intervene and the Italian, French, Spanish and East European bunch of Bankchiefs has the total power in putting the gun in front of you and force you to participate in risking your money in bubbles.

human

Mar 12, 2016 at 9:39 pm

Comment *Many words of wisdom in your article and comments you should send them to the bank dictators at ecb

randombypasser

Mar 13, 2016 at 2:15 pm

Well every act will end at some point and in the end the all actors get their applauses or tomatoes. This is, in it’s own way, just that, a typical act with all it’s actors, audience etc. And it will end, some day.

And though this all will have a massive impact on my personal economy as an European citizen i just can’t wait to see how this drama unwinds, who gets whacked and how much, who in the end actually wins something, if anyone, and who gets the blame and shame, if anyone.

Remember that whatever happens and whatever this all means to Your personal economy, You have had an outstanding privilege to live in this exceptional era of economy of mankind. There will be a lot to learn after all is said and done…

Juergen

Mar 14, 2016 at 2:29 am

Draghi is messing things up more and more. He cornered himself and by doing that the Euro-zone as a whole. No “weapons” left and a long, long way back to normal. And then there are the “drug addicts” in London and Frankfurt, desperately crying for their next needles… Draghi, this modern Dorian Gray (and not ot forget his stupid ECB-followers!) turned out to be one of the most dangerous men alive.

d

Mar 14, 2016 at 3:29 am

“Draghi, this modern Dorian Gray ”

Toto riina would be much closer to reality.

The Club med states must have a turn at the head of the ECB and it must produce failure.

This justifys several northern Austrian school ECB Governors, to follow him.

CB liquidity easing to the financial sector has run its course. It is now simply producing a growing nonworking cash Glut